The Difference between Sale of Assets and Sale of Shares

Maybe you want to buy a business or maybe you want to sell one. There are two common ways through which a business can be bought or sold: sale of assets or sale of shares.

In this article, we will discuss the difference between those two common ways from the tax and legal perspective.

What is a Sale of Assets?

An asset sale involves the sale of all or most of the assets in the company but not the shares of the incorporated company itself. For instance, it can include equipment, inventory, and accounts receivable. All types of business can be sold through an asset sale.

One main advantage is that you are not responsible for the liabilities of the existing business. This is crucial if the existing business has any unknown liabilities, since buying only the assets can mean you can have a fresh start. Also, if you are purchasing the assets of a business, you are not obligated to keep any of the non-union employees. Furthermore, as a buyer, you can negotiate the price of the assets to achieve the most tax benefit.

However, since the licenses will be in the existing company’s name, the buyer might need to apply and/or transfer for a new licenses. Also, lease agreements might need to be transferred and contracts renegotiated with the new buyer.

A share sale involves the sale of everything in the company including the incorporated company itself. It is like you are taking over the company as the new owner. Unlike an asset sale, only an incorporated company can be sold through a share sale.

There are risks involved when buying a business through a share sale. You, as a buyer, are responsible for all the liabilities that comes with the business. For example, if there was an excessive amount of tax write-offs by the previous owner, you will be liable to the CRA if they decide to carry out an audit. As a buyer, you may want to include a clause in the sales agreement to protect yourself from any pre-sale liabilities so that the seller is responsible.

It is often the case that a buyer only wants to buy the assets to minimize the risks whereas a seller wants to sell the shares to take advantage of the capital gains exemption. Whether the sale involves assets or shares, there are many considerations you need to be aware of to ensure that the transaction goes smoothly. You should seek the help of a lawyer to guide you through the transaction.

Whether you are selling your business to start another business or you are retiring, we can help you. For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at [email protected] or +1.613.747.2459 x 304

This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. 613-747-2459 ext.304, [email protected].